Banks Need To Focus On A New Customer: The Unbanked

Globally, 2 billion, mostly poor, adults don’t have bank accounts, and they’re an important new market for banks.

When most people think about companies like MoneyGram International, they think of unappealing strip mall locations with bulletproof glass where immigrants send money home and get payday loans at exorbitant interest rates. So it might come as something of a surprise that China’s Ant Financial, part of e-commerce giant Alibaba, and Kansas-based Euronet Worldwide, have been battling to buy MoneyGram, with Ant Financial upping its bid from $880MM to $1.2Bn before it emerged victorious.

That’s because MoneyGram has access to an increasingly appealing part of the population: the 15.6 million unbanked consumers in the United States. These are people who are living in households where no one has a checking or savings account. Until recently, this group, along with the 51.1 million U.S. adults who are considered underbanked, has been ignored by most banks because they typically have poor credit ratings and are unlikely to generate meaningful deposits or banking fees. But as more services go digital, smart banks are starting to see the potential of this large group in the U.S. and internationally. Worldwide, 2 billion adults and 160 million small businesses lack banking access, according to Global Findex.

Banks measure their efficiency by their cost-to-income ratio (expenses as a percentage of income). Banks with lower ratios are viewed as more efficient. In the U.S., retail and commercial banks typically have cost-to-income ratios in the 55-65% range, however, digital banks can enjoy ratios as low as 25-35%. It’s startling to think that banks in Egypt, where digital is the norm, are more efficient than American banks with an average cost-to-income ratio of 28% compared to 59% in the U.S.

This creates a huge opportunity. Banks could add $380 billion annually in revenue in emerging markets alone by reaching out to the un/underbanked, according to Accenture estimates. The biggest opportunities in emerging markets are in Brazil, India, Mexico, Nigeria, Vietnam and South Africa. And serving the unbanked has benefits beyond profits. By giving people access to savings accounts, credit and loans, banks can help build and strengthen emerging middle class populations that in turn drive growth in the broader economy.

The worlds of tech and retail are already seeing the potential here. Earlier this month, Amazon launched Amazon Cash which allows customers to go into retail stores and put cash into their Amazon accounts so they can shop online without a credit card. Walmart’s GoBank offers low-cost checking accounts targeted at people who don't use traditional bank accounts. BBVA Chairman Francisco Gonzalez warns that few banks will survive the coming competition from tech companies like Google and Facebook if they don’t court this group more aggressively.

The unbanked are more likely to embrace digital banking on their phones

Since the unbanked are not entrenched in the old-fashioned banking routines of branches, ATMs and credit cards, they are more likely to embrace digital banking on their phones. In Kenya, for example, M-Pesa uses a simple text message to allow people to send and receive money, resulting in almost half of Kenya’s GDP now flowing through the system. Established players like Orange and Telefonica are trying to replicate that success in markets from Latin America to Southeast Asia.

Some innovative banks are starting to create services for this population. Barclays’ ABSA Cellphone Banking service in Africa allows customers to use an app to open accounts, apply for loans and receive funds—something most U.S. bank customers still can’t do.

Smart banks need to move quickly to attract unbanked customers before fast-moving tech companies and retailers dominate this business. Banks can take three steps to reach this market:

Set up pure digital, stand-alone brands to target people underserved by banks. For example, Spain’s BBVA has pumped cash into online-only banks such as Atom in the UK and Simple in the U.S.

Create propositions that appeal to the unbanked within an existing bank’s structure, such as creating a no-fee service that is online only without access to physical branches.

Use technology, such as artificial intelligence, to develop new ways to assess the creditworthiness of non-traditional customers, going beyond credit scores and income checks. Mexico’s Banco Azteca, for example, assesses credit in an innovative way — sending motor-cycle-riding agents armed with handheld computers to the homes of borrowers to take an inventory of such things as stereos, TVs and appliances to offer loans of up to half the resale value of the collateral.

Inventor Thomas Edison once said “Opportunity is missed by most people because it is dressed in overalls and looks like hard work.” The unbanked and underbanked are often literally dressed in overalls and reaching them can be hard work, but for banks willing to put in the effort, the payoff will be worth it.